Wednesday, June 9, 2010

Ax may fall on tax break for mortgages

The Hill reports that "the popular tax break for mortgage interest, once considered untouchable, is falling under the scrutiny of policymakers and economic experts seeking ways to close huge deficits."

Although Congress last year rejected the White House’s proposed cut to the amount wealthier taxpayers can deduct for home mortgage interest payments, the administration included it again in its 2010 budget — saying it could save $208 billion over the next decade.

And now that sentiment has turned against all the federal red ink — and cost-cutting is in vogue — Democrats on President Barack Obama’s financial commission are considering the wisdom of permanent tax breaks such as the mortgage deduction and corporate deferral. Calling them “tax entitlements,” senior Democratic lawmakers have argued they should be on the table for reform just like traditional entitlement programs Medicare, Social Security and Medicaid.

The new spotlight on the mortgage deduction and other tax expenditures comes as the Obama administration and Congress consider ways to reduce deficits the Congressional Budget Office (CBO) expects will average nearly $1 trillion over the next decade.

Policymakers seeking savings have tried to cap the mortgage interest deduction before — and failed. Five years ago, a bipartisan tax reform commission created by President George W. Bush proposed ending the mortgage tax break. But the commission’s plan stalled in Congress, partly because of popular support for the mortgage deduction.

Obama’s proposal, which would cut the deduction rate for itemized expenses for those making more than $250,000 to the rate paid by the middle class, was panned last year by members of both parties. They worried about its effect, during a recession, on charitable deductions and the housing market.

The White House says it was included in the president’s budget proposal again this year because it remains a good idea.

“The proposal will correct inequities in our tax code that allow millionaires to benefit from higher itemized tax deductions than middle-class families enjoy,” said Meg Reilly, spokeswoman for the Office of Management and Budget (OMB).

Although the backers of the mortgage interest tax break defend it as a key incentive for people to own rather than rent their homes, some say that’s not so. A Brookings-Urban Tax Policy Center study found that the mortgage interest tax break costs more than $100 billion annually but does little to encourage the middle class and less wealthy to buy homes.

“I’m not sure that we need to subsidize homeownership at all through the tax system,” said Eric Toder, the study’s lead author.

A bipartisan tax reform proposal this year by Sens. Judd Gregg (R-N.H.) and Ron Wyden (D-Ore.) would lower base tax rates and eliminate a host of tax expenditures, but not the mortgage deduction. Gregg and Wyden said they left it out because they wanted a “politically viable vehicle,” conceding that ending the mortgage break would mean less support for their plan from other lawmakers.